Why natural gas injections affect thermal coal demand

Mike Sonnenberg - Author

Nov. 20 2020, Updated 1:35 p.m. ET

Coal losing market share to natural gas

The shale gas revolution altered the energy mix in the U.S. power generation space. Shale gas is gas that’s trapped in rock formations. In the past, it was difficult to explore for shale gas. It was also expensive. However, with technological developments, huge shale gas reserves became available for production over the last decade.

Companies invested in machinery to extract the shale gas. As a result, the production levels increased from just 1.3 trillion cubic feet (or tcf) in 2007 to 10.3 tcf in 2012. Combined with new regulations set by the U.S. Environmental Protection Agency (or EPA) to curb pollution, natural gas has been eating into coal’s market share for electricity generation.

The shale gas boom negatively impacted thermal coal producers (KOL) in the U.S.—like Peabody Energy (BTU), Cloud Peak Energy (CLD), and Westmoreland Coal Company (WLB). Consol Energy (CNX) is better off because it also produces natural gas.

The current state

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Coal’s share in electricity generation is down from over 50% in 2004 to 39% in 2013. During the same period, natural gas’ share increased from 18% to 27.5%. So far, coal hasn’t lost market share in 2014—compared to the same period last year. This is different from the trend that’s been seen in the last few years. However, it was mainly due to the market share it gained during the first quarter. The market share was used to fire power plants to meet unusually high demand for electricity for heating.

Going forward, coal’s market share in electricity generation is expected to fall more. It will decrease because of coal-fired plant retirements—we’ll discuss this in Part 6. Coal is also less important in the U.S. energy mix.  New shale discoveries will cause higher injections. This will lower the volatility in winter gas prices.

Natural gas storage

Natural gas storage is an important factor. It can also affect coal demand. Natural gas demand is highest during the winter months. Producers build up inventories over the summer—the injection period—to meet the demand for the next winter.

Shorter-than-expected storage could strain the available natural gas supplies. Natural gas’ loss is coal’s gain. A strain on natural gas supplies leads to higher coal demand to meet the shortfall—other things being equal.

Visit our Upstream Oil & Gas page to learn more about natural gas. As of September 26, producers had stock of 3.1 tcf—compared to 3.5 tcf for the same period last year and the five-year average.

How do natural gas prices impact thermal coal demand? We’ll discuss this in the next part of the series.


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